The Government Gets It Right

It's safe to say that there aren't a whole lot of student loan issues on which Albert Lord, Harris Miller, Robert Shireman and U.S. Rep. George Miller generally agree.

As a leading Democratic Congressman and chairman of the House of Representatives education committee, George Miller has been a vocal critic of abuses in the guaranteed student loan program, as has Shireman, whose Project on Student Debt advocates aggressively for students and is a zealous watchdog of financial and other excesses in the loan program. Harris Miller is president of the Career College Association, and while his members' for-profit colleges are not in lockstep with lenders, they depend heavily on a vibrant loan industry to finance their students' educations. And Lord, as chief executive officer of Sallie Mae, the nation's largest lender to students, is, for better or worse, the face of the industry.

Their differing perspectives have surfaced frequently in recent months as the instability in the financial credit markets, prompted by the subprime mortgage crisis, have raised concerns about a comparable meltdown in student loans. While lenders and other supporters of the loan program have warned that a major meltdown awaits if the federal government does not act to keep lenders in the federal loan program -- a position Harris Miller has also advocated as he has watched loan providers cut back their lending to the often high-risk students who attend many of his member institutions -- critics like Shireman have urged the government not to bail out an industry that they believe has until recently fed all too well at the federal trough.

But on Wednesday, as the U.S. Education and Treasury Departments formally unveiled their multifaceted plan[1] for ensuring that federal loan funds will continue to be available to college students in the coming academic year despite the credit crunch, there was widespread (if sometimes grudging) agreement among the holders of these diverse viewpoints and other observers that the federal agencies and Congress had struck a reasonable and appropriate balance in recent months in putting out the fire (or at least, depending on one's view, the embers that threatened to spread into a fire.)

The departments’ plan is “practical, workable and maybe most of all, quite helpful,” Lord, the Sallie Mae CEO, said during a conference call Wednesday at which company executives announced that despite widely dismissed rumors to the contrary, the nation’s largest student lender would continue to originate loans in the Family Federal Education Loan Program. “The economics of the proposal are okay, barely okay,” he said, adding that federal officials had driven “a difficult bargain indeed.”

Appropriately so, said Shireman, who was among those who had been fearful that department officials, out of concern that Sallie Mae or other major lenders might join the scores that have already bolted the loan program, might provide overly attractive terms to retain them. But, to his surprise, neither Congress, which passed a law (H.R. 5715[2]) giving the Education Department wide but temporary authority to ward off a potential loan crisis, nor the department itself did so.

“Congress and the Department of Education have shown a healthy degree of caution in not overstepping, not throwing money at the lenders,” Shireman said. “It helped that Congress created a temporary authority…. One can easily argue that giving somebody access to cheap credit in a credit crisis is perhaps excessive. But because this only lasts for a year, it does allow us to say, over next year to say, is this the right way to do it?”

It would be dangerous to overstate the level of consensus on the loan "crisis" (whether it exists is among the disputed elements) or on Congress and the Education Department's handling of the situation; there remains disagreement on everything from what caused it (especially whether or how much Congress's 2006 and 2007 cuts in subsidies to lenders contributed to lenders' woes) to whether some reductions in the availability of private student loans, especially, might not be such a bad thing given some students' overdependence on debt to finance their educations.

But it did seem clear Wednesday that in trying to balance the desire to ensure loan funds for students (in part by keeping lenders in the Family Federal Education Loan Program) and not hurting taxpayers by providing a bailout in the process, the department seems to have successfully walked the tightrope, in the eyes of most observers.

"D-Day has come and passed and all indications are that the FFEL crisis may have passed," Tim Ranzetta, president of Student Loan Analytics, which advises colleges in choosing lenders, wrote in an e-mail to his company's clients today.

In their announcement Wednesday, the Education and Treasury Departments said that in addition to the alternatives on which they (at Congress's urging[3]) had been working for months -- ensuring that the competing direct student loan program[4] can make twice as many loans next year as it made this year, and that a "lender of last resort" program involving guarantee agencies would be in place -- they would offer two short-term forms of help for lenders.

In one, the government would agree to buy loans made after May 1, 2008 (and through July 1, 2009) from lenders using a fee structure that would include the full value of the loans plus accrued interest, rebates of certain fees paid by lenders, and a $75-per-loan flat fee to cover some of the lenders’ costs. This proposal, which comes in the form of an option by the lender to sell the loans, is designed to give lenders "an opportunity ... to finance and keep loans in the event that capital markets improve," and to reassure investors wary of buying loans because they might later be unable to sell them that there will ultimately be a buyer for them (the government), Education Secretary Margaret Spellings said in her letter[5] laying out the programs' terms.

In the other plank of its plan, the government plans to invest in pools of loans in the way that private investors typically do, yielding the federal treasury a small profit but, importantly for lenders, providing a source of capital that they can reinvest in new loans. "Upon expiration," Spellings said in her letter, "a trust may refinance the loans in the private financial markets and pay off the department's participation interest or sell the loans to the department" as described above.

Even in their statements, though, the lawmakers revealed some of the fault lines that remain despite the general consensus that the government has acted with remarkable speed, adroitness and restraint in responding to the threat of a student loan credit crisis.

Kennedy's spokeswoman, Melissa Wagoner, concluded her statement by noting that "in the long term, Senator Kennedy believes that the best and most reliable option for students is for colleges to remove banks and lenders from the equation and use the Education Department's Direct Loan program instead" -- perhaps exacerbating the fear among some lenders that Democratic lawmakers may use the credit crunch as a wedge to bolster the student loan program they typically favor over the lender-based one.

And Miller's statement revealed the ambivalence that he and some other politicians have displayed about pursuing possible remedies for a loan crisis at the same time that they have sought to play down acknowledgment that it even exists. "To date," Miller said in his statement, "no student has been unable to get the federal loans for which they are eligible, and we’re confident that as long as the department does its job, that will continue to be the case.”

Comments like that grate at the Career College Association's Harris Miller. He praised Congress and the Education Department for their quick action (passing legislation and crafting plans in a matter of weeks, when it usually "takes a crisis of Katrina-like proportions" to prompt that type of speed) and took heart at the statement by Sallie Mae's Lord during Wednesday's teleconference that the loan giant would continue to loan to "all schools." But Miller noted that numerous lenders that have vowed to stay in the federal loan program have said they would do so in part by restricting who they lend to, shunning the sorts of high-risk (and typically low-income) students who attend for-profit colleges, two-year institutions, and historically black universities in disproportionate numbers.

"We're hearing consistently from our schools that they're hearing that lenders are pulling back from particular types of schools ... who have students from a particular demographic," Miller said. "Especially when you see lenders being, to some extent, rescued by taxpayers, to hear them turn around and say, sub rosa, that they're only going to lend to certain people at certain schools smells funny to us."